Accounting principles 10e by kieso chapter 17

Three Major Steps: Illustration 17-3 Preparing the Statement of Cash Flows Usefulness and Format SO 2 Distinguish among operating, investing, and financing activities... Loss on Sale of

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CHAPTER 17

Statement of Cash Flows

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Preview of CHAPTER1 7

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17-4 SO 1 Indicate the usefulness of the statement of cash flows.

Provides information to help assess:

1 Entity’s ability to generate future cash flows.

2 Entity’s ability to pay dividends and obligations.

3 Reasons for difference between net income and net cash

provided (used) by operating activities.

4 Cash investing and financing transactions during the period.

Usefulness of the Statement of Cash Flows

Usefulness and Format

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Classification of Cash Flows

Income Statement Transactions

Operating

Activities

Changes in Investments and Long-Term Asset Items

Investing

Activities

Changes in Long-Term Liabilities and Stockholders’

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17-6 SO 2 Distinguish among operating, investing, and financing activities.

Illustration 17-1

Typical receipt and payment classifications

Classification of Cash Flows

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Classification of Cash Flows Illustration 17-1

Typical receipt and payment classifications

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1 Direct issuance of common stock to purchase assets.

2 Conversion of bonds into common stock.

3 Issuance of debt to purchase assets.

4 Exchanges of plant assets.

Companies report noncash activities in either a

 separate schedule (bottom of the statement) or

 separate note to the financial statements.

SO 2 Distinguish among operating, investing, and financing activities.Significant Noncash Activities

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SO 2 Distinguish among operating, investing, and financing activities.Format of the Statement of Cash Flows

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Format of the Statement of Cash Flows

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Illustration: Classify each of these

transactions by type of cash flow activity.

SO 2 Distinguish among operating, investing, and financing activities.

1 Issued 100,000 shares of $5 par value

common stock for $800,000 cash.

2 Borrowed $200,000, signing a 5-year note

Format of the Statement of Cash Flows

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Three Sources of Information:

Preparing the Statement of Cash Flows

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Three Major Steps:

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Three Major Steps:

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Three Major Steps:

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Companies favor the indirect

1 Easier and less costly to

Indirect and Direct Methods

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17-18 SO 3 Prepare a statement of cash flows using the indirect method.

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17-20 SO 3.

Additional information for 2012:

1 The company declared and paid a $29,000 cash dividend.

2 Issued $110,000 of long-term bonds in direct exchange for land.

3 A building costing $120,000 was purchased for cash Equipment costing $25,000 was also purchased for cash.

4 The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated depreciation $1,000) for $4,000 cash.

5 Issued common stock for $20,000 cash.

6 Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.

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Step 1: Operating Activities

Determine net cash provided/used by operating activities by

converting net income from accrual basis to cash basis.

Common adjustments to Net Income (Loss):

 Add back non-cash expenses (depreciation, amortization,

or depletion expense).

 Deduct gains and add losses.

 Changes in noncash current assets and current liabilities.

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Which is an example of a cash flow from an operating

activity?

stockholders.

Question

SO 3 Prepare a statement of cash flows using the indirect method.

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Depreciation Expense

Although depreciation expense reduces net income, it does

not reduce cash The company must add it back to net

income

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Loss on Sale of Equipment

Companies report as a source of cash in the investing

activities section the actual amount of cash received from

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Loss on Sale of Equipment

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Changes to Noncash Current Asset Accounts

When the Accounts Receivable balance decreases , cash

receipts are higher than revenue earned under the accrual

basis

Company adds to net income the amount of the decrease in

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When the Inventory balance increases , the cost of

merchandise purchased exceeds the cost of goods sold

Cost of goods sold does not reflect cash payments made for

merchandise The company deducts from net income this

inventory increase.

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When the Prepaid Expense balance increases , cash paid for

expenses is higher than expenses reported on an accrual

basis The company deducts the decrease from net income

to arrive at net cash provided by operating activities.

than the expenses paid.

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Changes to Noncash Current Liability Accounts

When Accounts Payable increases , the company received more

in goods than it actually paid for The increase is added to net

income to determine net cash provided by operating activities.

When Income Tax Payable decreases , the income tax expense

reported on the income statement was less than the amount of

taxes paid during the period The decrease is subtracted from

net income to determine net cash provided by operating activities.

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Changes to Noncash Current Liability Accounts

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SO 3

Summary of Conversion to Net Cash Provided

by Operating Activities—Indirect Method

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Company purchased land of $110,000 by issuing long-term

bonds This is a significant noncash investing and financing

activity that merits disclosure in a separate schedule.

Land 1/1/12 Balance

12/31/12 Balance 130,000

Step 2: Investing and Financing Activities

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Net cash provided by operating activities 172,000 Cash flows from investing activities:

Purchase of building (120,000) Purchase of equipment (25,000) Sale of equipment 4,000 Net cash used by investing activities (141,000) Cash flows from financing activities:

Issuance of common stock 20,000 Payment of cash dividends (29,000) Net cash used by financing activities (9,000) Net increase in cash 22,000

Cash at beginning of period 33,000

Cash at end of period $ 55,000

Partial statement

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From the additional information, the company acquired an

office building for $120,000 cash This is a cash outflow

reported in the investing section.

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Purchase of building (120,000)

Purchase of equipment (25,000) Sale of equipment 4,000 Net cash used by investing activities (141,000) Cash flows from financing activities:

Issuance of common stock 20,000 Payment of cash dividends (29,000) Net cash used by financing activities (9,000) Net increase in cash 22,000

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The additional information explains that the equipment increase

resulted from two transactions: (1) a purchase of equipment of

$25,000, and (2) the sale for $4,000 of equipment costing $8,000

Accumulated depreciation 1,000

Loss on sale of equipment 3,000

Equipment 8,000

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Cash flows from operating activities:

Net income $ 145,000 Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation expense 9,000

Loss on sale of equipment 3,000

Decrease in accounts receivable 10,000 Increase in inventory (5,000) Increase in prepaid expenses (4,000) Increase in accounts payable 16,000 Decrease in income taxes payable (2,000) Net cash provided by operating activities 172,000 Cash flows from investing activities:

Purchase of building (120,000)

Purchase of equipment (25,000) Sale of equipment 4,000

Net cash used by investing activities (141,000) Cash flows from financing activities:

Issuance of common stock 20,000 Payment of cash dividends (29,000) Net cash used by financing activities (9,000)

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Issuance of common stock 20,000

Payment of cash dividends (29,000) Net cash used by financing activities (9,000) Net increase in cash 22,000

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Retained earnings increased $116,000 during the year This

increase can be explained by two factors: (1) Net income of

$145,000 increased retained earnings, and (2) Dividends of

$29,000 decreased retained earnings.

1/1/12 Balance 48,000 Net income

145,000

12/31/12 Balance 164,000

Dividends 29,000

Retained Earnings

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Which is an example of a cash flow from an investing

activity?

stock

Question

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Issuance of common stock 20,000

Payment of cash dividends (29,000)

Net cash used by financing activities (9,000) Net increase in cash 22,000 Cash at beginning of period 33,000 Cash at end of period $ 55,000

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Compare the net change in cash on the Statement of Cash

Flows with the change in the cash account reported on the

Balance Sheet to make sure the amounts agree.

Step 3: Net Change in Cash

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17-48

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Free Cash Flow

after adjustment for capital expenditures and dividends.

Using Cash Flows to Evaluate a Company

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Using Cash Flows to Evaluate a Company

SO 4 Analyze the statement of cash flows.

Cash provided by operating activities

Free cash flow

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Using a Worksheet to Prepare the Statement of Cash

Flows-Indirect Method

Illustration 17A-1APPENDIX 17A

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1 Enter in the balance sheet accounts section the balance

sheet accounts and their beginning and ending balances.

2 Enter in the reconciling columns of the worksheet the data

that explain the changes in the balance sheet accounts other than cash and their effects on the statement of cash flows.

3 Enter on the cash line and at the bottom of the worksheet the

increase or decrease in cash This entry should enable the totals of the reconciling columns to be in agreement.

SO 6 Explain how to use a worksheet to prepare the

statement of cash flows using the indirect method.

Using a Worksheet

Preparing a Worksheet

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Using a Worksheet

to Prepare the

Statement of Cash Flows-Indirect

Method

Illustration 17A-3

Completed worksheet—

indirect method

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1 Compute net cash provided by operating activities by

adjusting each item in the income statement from the accrual basis to the cash basis.

2 Companies report only major classes of operating cash

receipts and cash payments.

3 For these major classes, the difference between cash

receipts and cash payments is the net cash provided by operating activities.

APPENDIX 17B Method Direct

Statement of Cash Flows-Direct Method

SO 6 Prepare a statement of cash flows using the direct method.

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Illustration 17B-2

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17-56 SO 6 Prepare a statement of cash flows using the direct method.

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17-58 SO 6 Prepare a statement of cash flows using the direct method.

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Cash Receipts from Customers

For Juarez Company, accounts receivable decreased $3,000.

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Cash Payments to Suppliers

In 2012, Juarez Company’s inventory increased $10,000 and

cash payments to suppliers were $678,000.

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Cash Payments for Operating Expenses

Cash payments for operating expenses were $179,000.

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Cash Payments for Income Taxes

Cash payments for income taxes were $24,000.

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Increase in Equipment. (1) Juarez purchased for cash equipment

costing $180,000 And (2) it sold for $17,000 cash equipment

costing $20,000, whose book value was $18,000.

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Increase in Land. Juarez’s land

increased $60,000 The additional

information section indicates that the

company issued common stock to

purchase the land.

Significant noncash investing and financing

transaction.

Increase in Bonds Payable. Bonds

Payable increased $130,000 The

additional information indicated that

Juarez issued, for $130,000 cash,

bonds with a face value of $130,000.

Financing activity.

SO 6 Prepare a statement of cash flows using the direct method.Step 2: Investing and Financing Activities

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